What Are the Constraints to Inclusive Growth in...

What Are the Constraints to Inclusive Growth in Zambia?

Elena Ianchovichina and Susanna Lundström

PREM weekApril 22, 2008

Business Environment Analysis

Returns to economic activity Cost of finance

Social Returns Private Appropriability

International sourcesof finance

Local sourcesof finance

Domestic savings Financial sector intermediationGovernment failures Market failures

Macro risks Micro risks

Economic Growth

Poverty Reduction

Wage-employedSelf-employed

Employability Analysis


Income increases through productive employment

Viewed from the perspective of the poor as productive actors…

Three Main PartsThe overall dynamics and what it tells us about the potential in different sectors

Growth-Poverty Pattern, Sector Dynamics and Productivity Dynamics

Identifying the productive activities and resources of the poorGoing through the extended tree with the objective of increasing in a sustainable way the income of the poor

Given the characteristics and future opportunities of the poor identified in step one and two.

Introduction 5

Increased and less volatile growth rates

-15

-10

-5

0

5

10

15

20

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

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1990

1992

1994

1996

1998

2000

2002

2004

2006

%

050

100150

200250

300350

400450

500

LCU

thou

sand

s

GDP per capita growth (annual %) GDP growth (annual %) GDP per capita (constant LCU)

Development driven by discrete events or potentially sustainable growth?

0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

800.0

1965

1970

1975

1980

1985

1990

1995

2000

2005

0

1000

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7000

Production (mt'000) LHS International price (constant 1990 USD mt) RHS

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100

120

140

1980 1985 1990 1995 2000 2004Nu

mbe

r of e

xpor

ts0.00

0.20

0.40

0.60

0.80

1.00

1.20

Inde

x/sh

ares

No. of products exported (> 10,000 US$)Herfindahl IndexFive largest (share of merchandise exports)

Loans to the private sector

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

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Jun-

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Dec

-99

Jun-

00

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-00

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01

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-02

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03

Dec

-03

Jun-

04

Dec

-04

Jun-

05

Dec

-05

Jun-

06

Dec

-06

Jun-

07

Agriculture, forestry,Fishingand huntingMining and quarying

Manufacturing

Electricity, gas, water andenergyConstruction

Wholesale and retail trade

Restaurants and hotels

Transport, storage andcommunicationsFinancial services

Community, social andpersonal servicesReal estate

Other sectors

Rural poverty reduction not responsive to growth

20

30

40

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60

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90

100

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06

Pove

rty

Head

Cou

nt (%

)

150

170

190

210

230

250

270

290

310

GDP

Per

cap

ita (1

994

Kwac

ha)

National Headcount (LHS)National Rural (LHS)National Urban (LHS)Poverty headcount at 1US$ a dayGDP Per Capita (RHS)

Inverse relation between productivity levels/growth and employment levelsPaths out of poverty has mainly been through new employment opportunities in low-cost urban areas, or higher returns in other urban areas Productivity growth has been on the rise except in agriculture where also employment opportunities has stagnated

Value added per worker in Zambia

0

500

1000

1500

2000

2500

3000

2000 2001 2002 2003 2004 2005 2006

LCU

in th

ousa

nds

Total Agriculture Industry Services

Source: Authors’ estimates based on data from Government of Zambia and World Bank.

70%

7%

23%

AgricultureIndustryServices

What are the sources of income for the rural poor in Zambia?

Table 1: Mean Shares of Household Income by Source, by Income Quintile, Rural Areas

Quintile of National Distribution All Poorest

20% 2 3 4 Richest

20% Food crop sales 6 7 6 6 6 5 Nonfood crop sales 2 1 2 3 2 2 Non-farm business 10 11 10 10 13 11 Livestock and other ag. Income 2 2 2 3 2 3 Salary 6 3 5 6 7 11 Remittances 6 7 6 6 7 5 Pension 0 0 0 0 0 0 Nonagricultural rent 0 0 0 0 0 0 Other income 11 13 12 12 11 9 Consumption of own production 55 57 55 54 55 52

Source: World Bank (2007a)

Most rural poor are smallholder subsistence farmers

What are the sources of income for the urban poor in Zambia?

Most urban poor are employed in informal businessesand rely on multiple activities as a source of income

Table 3. Mean Shares of Household Income by Source, by Quintile, Urban Areas Quintile of National Distribution All Poorest 20% 2 3 4 Richest 20% Non-farm business 24 25 27 27 26 19 Salary 50 38 40 46 50 60 Remittances 6 8 6 5 6 5 Other income 15 20 19 16 14 13 Consumption of own production 5 9 7 7 4 3 100 100 100 100 100 100 Source: 2002-03 LCMS

Any reasons to focus on agriculture?

Evidence that there is potential for productivity improvement inagricultureEven a sizable increase in employment in urban industries will result in relatively few urban jobs

Figure 1: Distribution of employed by industrial sector in the rural and urban areas (2004)

0

500000

1000000

1500000

2000000

2500000

Agric. Mining Manuf. Elect. Constr. Trade Hotels Transp. Finance Commun.

Rural

Urban

Source: CSO (forthcoming)

Implication of the booming mining sector

The capital intensive nature implies that few new jobs are createdAdverse REER effects on the competitiveness and job opportunities of the tradable sectors

Look for constraint to inclusive growth through:

Self as well as wage employmentAgriculture as well as non-agriculture activitiesUp-coming data on employment and additional analysis may help to narrow down further

Economic Growth

Poverty Reduction


Employability Analysis:

Education, Health




Is education a major constraint for the poor as individuals?

Major difference in mean years of education between the rich and poor households in urban areas, and limited access to higher education in rural areas

Table 1: Mean years of schooling of household head in 2002/03

All Poorest 20% Richest 20% Rural 5.3 4.4 6.2 Urban 9.3 6.6 11.1

Source: World Bank (2007a)

0102030405060708090

100

Middle Basic School(1-7)

Secondary School

RuralUrban

Percentage of households with access to education facilities within five kilometers

Is health a major constraint for the poor?

HIV/AIDS costs almost 1 percent in GDP growth per year

Prevalence rates are high: 17% of working age population in 2005 compared to the SSA average of 6%.High prevalence rates combined with poor health care provision and other diseases undermine

Labor stock and ability to provide labor;Productivity of the work force;Incentives for investment;

Economic Growth

Poverty Reduction


Employability Analysis:

Education, Health




Is the cost of capital a binding constraint to firms’ investment and growth?

Figure 1: Real cost of capital (average)

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

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100.0

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Per

cent

Zambia Mongolia South Africa Uganda

Source: Authors’ own calculations using World Bank data.

But, cost and access of capital differentials are sizable

Access and cost of capital varies with the size of the firm

In 2003, nearly 50 percent of larger firms had a loan, while only 19 percent of small firms had a loanThe cost of capital differential between large and small firms was more than 10 percentage pointsSimilar differentials existed between the cost of capital of exporters and non-exporters, domestic and foreign companiesMicro firms face even steeper constraints

What are the reasons for the poor access to and high cost of finance for small and micro firms?

Poor financial intermediation rather than low domestic savings or bad international finance

Domestic savings as a share of GDP climbed up from 6% in 1990s to 18.1% in 2006, a share higher than the SSA averageFDI and aid have been higher than the average for SSA and LICs both in 1990s and 2000s

However, there are signs of improvements: the percentage of people identifying the cost of finance as the main reason for their poverty status halved in the period 2002-06

Do low social returns constrain income growth?

Zambia is well endowed with natural resourcesLandlocked geographic position:

Pros: Serves as an import tax protecting domestic import-competing industries; borders 8 countries and plays an active role in regional tradeCons: reaching global markets and realizing economies of scale is a problem

Affects ability to export bulky low–value products (e.g. farm products)Requires well-developed air transport and an emphasis on high value, low weight and volume goods

Access to air transport is low for Zambia’s level of per capita income

ZambiaZambiaZambiaZambia

GDP per capita (logs)

Fitted values 95% CI

Are infrastructure and basic services a binding constraint to income growth?

High domestic transport costs due to poor domestic road condition and high fuel:

affect the ability of rural residents to access markets;The reasons for poor access is not always because of limited supply (e.g. electricity), but because of industry structures and interestsPoor quality and expensive basic services undermine the competitiveness of firms and slow down job creation

Cost-structure: firm-level averages

Source: Eifert, Gelb, and Ramachandran (2005)

Connectivity servicesMobile rates per minute

$0.44

$0.32

$0.29

$0.27

$0.25

$0.25

$0.21

$0.14

$0.10

$0.04

$0.00 $0.05 $0.10 $0.15 $0.20 $0.25 $0.30 $0.35 $0.40 $0.45

Zambia

Botswana

Malawi

South Africa

Tanzania

Swaziland

Namibia

Mozambique

Zimbabwe

Mauritius

Source: Mattoo and Payton (2007)



Social ReturnsInfrastructure servicesBinding constraint to

growth

Private Appropriability





Is the macroeconomic environment a binding constraint to shared growth?

Exchange rate developments

5060708090

100110120130140150

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

REE

R in

dex

(199

7=10

0)

0

1,000

2,000

3,000

4,000

5,000

6,000

Nom

inal

Kw

acha

per

dol

lar




growth





Macro risksREER appreciation

Binding constraint togrowth

Micro risks

Are property rights over land a major constraint to income growth?

Customary land arrangements with limited transfer possibilities are dominant, with only 6-15% of land under statutory tenureThe land system is not perceived as a binding constraint to shared growth

Land is abundant – only 40% of arable land is usedMost smallholders who demand more land get land from their chiefs (only 4% of respondents mentioned lack of land as a reason for poverty)Despite small plot sizes, a typical household does not have capability to cultivate more landThe system creates risks to future returns on investmentsLack of serviced land with access to infrastructure is a perceived binding constraint to operations implying not land, but rural infrastructure is a bottleneck

Is regulatory uncertainty and government interventions an obstacle to shared growth?

Regulatory uncertainty is the fourth most binding constraint to firms’ operations

Most of firm owners (70 percent) think that officials’interpretation of regulations is inconsistent and unpredictableProblem is especially acute in agriculture

Fertilizer subsidy programLast minute contracts push up the cost of the inputProgram not well targeted opens opportunities for rent seekingProgram is expensive (accounts for 50% of the budget earmarked for agriculture, compared to only 3% for irrigation and other rural infrastructure)

Is governance a constraint?




growth







Micro risksRegulatory uncertainty

Government effectivenessBinding constraint to

growth

Are market failures binding constraints for income growth?

Firms need services requiring simultaneous, large scale investments in:

basic infrastructure and connectivity services which ensure access to inputs and foreign markets;marketing, state-of-the-art technology, and product quality information services

Might be a development trap:No incentives for private investor before a certain level of economic activityEspecially severe in sparsely populated countries

Rural-urban differentials in connectivity service provision

Poor access and high cost of basic services are major constraints to growthRural areas are at a disadvantage relative to urban areas

0

20

40

60

80

100

120

FoodMarket

InputMarket

Post Office PublicTransport

PublicPhone

InternetCafe

RuralUrban

Source: CSO (forthcoming)

Farm level productivity is negatively correlated with weak service performanceExamples where there were positive coordination externalities (e.g. outgrower schemes)

Number of households with access to facilities within 5 km




growth




Domestic savings Financial sector intermediationGovernment failures

Market failuresCoordination failuresBinding constraint to

growth



Micro risksRegulatory uncertainty

Government effectivenessBinding constraint to

growth

Bindings constraints to shared growth in Zambia

Lack of positive coordination externalities (rural-urban connectivity)Poor government effectivenessRegulatory uncertainty and government interventions (stop doing harm before doing good, especially severe in agriculture)Real exchange rate appreciation (international connectivity)Access to post-primary education and health for the poor

Appendix:Incidence of poverty by stratum (%)

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50

60

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80

90

100

Rural AgrSmall

Rural AgrM edium

Rural AgrLarge

Rural Non-Agr

Urban LowCost

UrbanM edium

Cost

Urban HighCost

1996199820042006

Appendix:Number of people employed by stratum

0

500000

1000000

1500000

2000000

2500000

RuralAgr

Small

RuralAgr

Medium

RuralAgr

Large

RuralNon-Agr

UrbanLowCost

UrbanMedium

Cost

UrbanHighCost

1996

1998

2004

2006

What Are the Constraints to Inclusive Growth in...

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